There are many types of auto loans that borrowers may qualify for. But the one that's right for you depends on your situation, and specifically, your credit score.
Types of Auto Loans
Within the scope of auto loans that are available to borrowers, there are many different categories (such as first-time buyer programs or lease buyout loans) that you may fall into. So before you think you're a shoo-in, or that getting a loan is going to be impossible, check into all the resources at your disposal.
These car loans are typically reserved for people with good credit and usually come from a bank, credit union, or online lender. They're called direct loans because you're dealing directly with the financial institution underwriting or backing the loan. When you do this, you're viewed as a cash buyer when you get to the dealership, or, can present a check directly to the private seller if you're going this route.
Direct loans tend to have lower interest rates attached to them compared to other types of loans. The biggest factor in determining an interest rate is your credit score, so when loans go to consumers with higher credit scores, a lower interest rate typically follows suit.
If your credit score falls below 670, you may have difficulty qualifying for this type of loan. But if you're a long-standing member of a credit union, you may still have a chance. Credit unions can often pass savings and loan opportunities on to their members at a lower rate than you may find at a bank since they're not-for-profit institutions.
Indirect loans are loans that you get through a franchised dealership’s captive lenders or financial institution that's signed up with an independent dealer. You don't meet with these lenders directly, and instead, you typically speak with the dealership's special finance manager.
When you have credit challenges such as a low credit score, thin credit file, or past negative marks such as bankruptcy or repossession on your credit reports, you're likely to have a better chance of qualifying for an indirect loan.
This type of loan includes special financing, which is designed for borrowers with lower credit. In this situation, the lenders that can provide loans look at more than your credit score to help you qualify for an auto loan.
In-house financing is found at buy here pay here (BHPH) car lots, where the dealer selling you the vehicle is also financing it. These lenders only deal in used cars and are a go-to for borrowers who've been turned down for other types of lending, especially if they're turned down for a lack of credit.
The major reason no-credit borrowers seek out this type of loan is that some BHPH dealers don't pull your credit reports, and others may not look at your credit score in every case. These dealers typically rely on your income and down payment amounts as the main requirements of loan qualification.
Refinancing is a type of indirect loan, but to qualify for one, you must already have an existing auto loan. These loans are designed for people who have taken on financing but are looking for a better deal, usually to save money on your monthly payment.
Just like any other auto loan, some qualifications must be met. As with traditional, direct loans, refinancing can be easier to come by if your credit score is in the good or excellent range. However, if you originally took out a bad credit car loan, you've kept up with it for at least a year, and your credit score has improved, you may qualify for this loan type.
Car Loans Come in Many Forms
Loans come in all shapes and sizes for many different types of items. The one thing they all have in common is that they're typically for big-ticket items that most people need, like appliances, homes, and cars.
When it comes to auto loans, the type of loan you need, and the type of loan you can qualify for can vary based on your situation – and the dividing line is generally whether or not you have good credit.
Many types of loans can only be obtained with a credit score in a good range (or above) on the FICO credit scoring model, typically a credit score of 670 or higher on a scale from 300 to 850. Many of these loans are what consumers might think of as "a traditional loan" where you go to the bank, or a dealership, get approved for a certain amount, pick out your car and drive away.
This description may be a bit simplified, but essentially, this is the process involved in a direct loan. These loans can be harder to come by if you're struggling with credit issues, but in the world of auto loans, they're only one option.
Finding an Auto Loan With Bad Credit
If your credit score has been cramping your style when it comes to finding the car loan that's right for you, we want to help. At The Car Connection, we've built a nationwide network of special finance dealerships that have lenders ready to help in many unique credit situations.
Since it can be hard to tell which dealers work with subprime lenders, let us do the searching for you. You can save time and hassle by filling out our free, zero-obligation car loan request form, and we'll help you make a connection with a local dealership that has the resources you're looking for.